Legal Question in Business Law in California

Re: S-Corp. Assets

Almost anything can be used as paid in capital for a new entity. It is always good to work with an attorney or accountant to make sure that the transfers are properly documents so that there is no issue with commingling personal and business assets.

Re: S-Corp. Assets

You can indeed transfer assets to the new corporation as you describe. You can exchange the assets for cash or stock, but since the new corporation probably doesn't have much cash, the more usual way would be to cause the corporation to issue stock to you.

If you are the sole shareholder, the valuation issues are fairly nominal, and any reasonable value you attach to each item should pass muster. If there are other shareholders, you need to treat them fairly, and this points to getting an appraisal or negotiating fair value.

Often I recommend to clients forming corporations to value their stock at a simple figure like $1 a share, or $10, to make it easier to issue each purchaser or contributor of assets the correct number of shares. Keep in mind the limitation imposed by the number of authorized shares per the Articles of Incorporation.

Also, remember you have to report securities transactions to the Commissioner of Corporations. There is a downloadable form for this purpose.

Transferring assets to a new corporation in exchange for stock is usually a non-taxable transaction. If, however, the exchange results in a profit or loss to the shareholder-investor, there could be capital gains/losses consequences. For this reason, the exchange should be at fair value, and if the asset has been used by another business and depreciated, a transfer at other than the depreciated value would have tax consequences for the transferor.

Also, when someone receives stock for services performed for the new business, he is in effect earning income, and the value of the shares received would be taxable income to the holder.

Re: S-Corp. Assets

Yes, you can transfer those assets to the S-corp in exchange for the stock you get. The value you assign to the assets should be their current fair market value -- that is, what you could sell them for now, as opposed to what you paid for them or their replacement value.

You can assign an approximate value ($5,000 for example) and have the corporation give you 5,000 shares of stock in exchange for the assets.